Reference no: EM133205669

1. Your investment club has only two stocks in its portfolio. $25,000 is invested in a stock with a beta of 0.6, and $35,000 is invested in a stock with a beta of 1.6. What is the portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places.

2. AA Corporation's stock has a beta of 0.5. The risk-free rate is 5%, and the expected return on the market is 13%. What is the required rate of return on AA's stock? Do not round intermediate calculations. Round your answer to one decimal place.

3. Suppose rRF = 6%, rM = 11%, and rA = 9%.

a. Calculate Stock A's beta. Round your answer to one decimal place.

b. If Stock A's beta were 1.2, then what would be A's new required rate of return? Round your answer to one decimal place.

4.. Stock R has a beta of 1.2, Stock S has a beta of 0.85, the expected rate of return on an average stock is 11%, and the risk-free rate is 5%. By how much does the required return on the riskier stock exceed that on the less risky stock? Do not round intermediate calculations. Round your answer to two decimal places.

5. LL Incorporated's currently outstanding 8% coupon bonds have a yield to maturity of 5.7%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 25%, what is LL's after-tax cost of debt? Round your answer to two decimal places.

6. Burnwood Tech plans to issue some $50 par preferred stock with a 8% dividend. A similar stock is selling on the market for $60. Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places.

7. Summerdahl Resort's common stock is currently trading at $39 a share. The stock is expected to pay a dividend of $1.50 a share at the end of the year (D1 = $1.50), and the dividend is expected to grow at a constant rate of 7% a year. What is the cost of common equity? Round your answer to two decimal places.

8. Booher Book Stores has a beta of 1.1. The yield on a 3-month T-bill is 5% and the yield on a 10-year T-bond is 8%. The market risk premium is 4.5%, and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM? Round your answer to two decimal places.

9. Shi Import-Export's balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi's tax rate is 25%, rd = 8%, rps = 5.1%, and rs = 10%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC? Round your answer to two decimal places.

10. Donald Gilmore has $100,000 invested in a 2-stock portfolio. $72,500 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

11. Zacher Co.'s stock has a beta of 0.66, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?

12. Porter Plumbing's stock had a required return of 13.75% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.)

13. Stock A's stock has a beta of 1.30, and its required return is 11.75%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)

14. Fiske Roofing Supplies' stock has a beta of 1.23, its required return is 11.25%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.)

15. Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 25%, what is the component cost of debt for use in the WACC calculation?

16. Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?

17. When working with the CAPM, which of the following factors can be determined with the most precision?

18. Bartlett Company's target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of common using reinvested earnings is 12.75%. The firm will not be issuing any new stock. You were hired as a consultant to help determine their cost of capital. What is its WACC?

19. Avery Corporation's target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from reinvested earnings is 11.25%, and the tax rate is 25%. The firm will not be issuing any new common stock. What is Avery's WACC?